Before seeing what has changed, however, let's take a look, as a reminder, at the constants that continue to produce their positive effects. The most important is of course growth, which continues and is, if anything, redistributing itself from America to Europe after being heavily biased in favor of the former in the second quarter. The second is given by buy back, which continue unabated at a rate of one trillion a year in the United States. These two factors should continue to operate in the next six months.
Moderating the two positive constants is the negative background constant of normalization of monetary policies, as slow as you like but, precisely, constant. This normalization raised yields on the short end of the curve but went broadly in step with inflation. Real rates remain at or below zero, while inflation expectations embedded in the long end remain contained.
We come then at three novelties and let's start duties.
In recent months, the maximum systems have been brought out on duties and have been implemented in the market very ideological speeches on liberalism and protectionism, on the end of globalisation, progress and growth.
The reality that is manifesting before our eyes is less high-sounding and more articulated. Trump's offensive is producing three different strategies, one for North America, one for Europe and one for China.
In North America there is a move towards a rebalancing of NAFTA, with the United States recovering part of the space it had granted to Mexico and Canada. There are no new barriers worthy of note but a redistribution of loads. The agreement between Trump and the left-wing populist López Obrador is significant on the $16 minimum wage for Mexicans making cars for the United States, a nod from Trump to American unions and an idea that López Obrador is happy to sell to his constituents.
With Europe we are moving towards a zeroing of car tariffs. Merkel and Malmström accepted the idea, thrown there by Trump as an alternative to a trade war and initially considered impossible. If this is the case, the German stock exchange will have a good cyclical recovery, provided that the stronger euro does not take away the rise again.
With China, things are different. Here it is now clear that on the American side there is not only the desire to rebalance trade but also above all to downsize China's strategic ambitions. The production chains of China and America will gradually separate, to the great advantage of countries such as Vietnam or Bangladesh.
Overall, seeing resolution to two of the three trade conflicts on the table is a positive development. Equally important is the idea that the exhaustion of this first wave of inflation is making its way. David Zervos has summed up very well two of the great ongoing processes. On the one hand, he says, there is a positive supply shock in the United States (deregulation, reduction of the tax burden), while on the other hand, through duties, sanctions and the use of the dollar as a political weapon, there is a negative demand shock that starts from China and spreads towards the producers of raw materials fueling China's industrial growth. More supply on the one hand and less demand on the other can only have an effect of containing the inflationary pressures possibly generated by the decrease in unemployment.
A third positive element, in addition to duties and inflation, is that the numbers that are beginning to filter through the negotiations between the Italian government and the European Commission do not seem particularly alarming. To contextualize, we recall that France, which will have a deficit of 2.4 this year, will climb back to 3 in 2019. In short, if we want to create turbulence on the markets (both on the Italian and European sides) it will be above all for political reasons.
All right, then? No, let's not exaggerate. There are problems in emerging countries. The parallel cases of Argentina and Türkiye, which have similar problems of foreign debt and high current account deficits, do not only concern countries that for political reasons want to fend for themselves (Turkey) but also those that disciplinedly follow the instructions of the IMF (Argentina).
The picture is very fluid and the calm of the markets shouldn't suggest a world that doesn't move. Actually the world we are facing in the coming years will be restless and turbulent and this is also why we continue to think that the solid part of portfolios will have to be really solid.
In summary, we are positive (at least for a couple of months) on the American stock market and, in Europe, on the euro and the stock exchanges (which, however, will have to share the benefits of a tariff agreement with America). Let's wait a few more weeks to become, if necessary, cautiously positive about Italy.
In general what we are seeing in America does not necessarily seem like a double top (the first, we recall, was in January). Double tops are typical of major cycle reversals, such as 2000 and 2007. There will be a reversal someday, of course, but not in 2018.
